Facts
First instance
Court of Appeal
Why common law rules on breach of contract do not apply
Court of Appeal decision
Comment


The recent Court of Appeal decision in Bishop v Golstein(1) has provided welcome clarification on the way to dissolve a traditional partnership where one party has repeatedly breached the partnership agreement. However, practitioners are likely to be more interested in the obiter comments of Lord Justice Briggs regarding the place of repudiation, affirmation and the 'last-straw' doctrine(2) in partnership law. Partners themselves may be concerned about the potential cost.

Facts

Mr Bishop and Mr Golstein merged their solicitors' practices in 2007. Bishop was a property and real estate practitioner and Golstein was a litigator. They agreed to commit to a minimum fixed term of four years, after which either could retire from the partnership on six months' notice. They were to manage the practice jointly and share the profits 70:30. However, Bishop promised Golstein a minimum annual fixed profit share of £125,000, based on Golstein's historical profits as a sole practitioner.

From early on, the partnership was an unhappy one, partly because Golstein's failure to achieve expected profits upset Bishop, although Golstein agreed to draw half of his minimum fixed share as a result. However, as time passed Bishop:

  • ignored Golstein's requests for amendments to the draft partnership accounts;
  • instructed the partnership accountants not to send further draft accounts to Golstein from October 2009 to February 2010;
  • tried to terminate the lease of the partnership premises in November 2009 without informing Golstein;
  • allowed employees of the partnership to be rude to and uncooperative with Golstein without censure;
  • excluded Golstein from all decision making; and
  • stopped communicating with Golstein from November 2009 onwards. All subsequent correspondence was through solicitors for each party.

In 2010 Bishop was investigated by the Law Society for accounting irregularities, eventually resulting in the levy of a fine in 2011.

Bishop served a notice to dissolve the partnership on March 29 2010. Golstein denied that the notice was valid and on June 30 2010 served his own notice to dissolve the partnership, citing:

  • a clause of the partnership agreement which related to dissolution where one partner is subject to "severe disciplinary proceedings from the Law Society"; and
  • "the breakdown of the relationship between us".

Golstein accepted this in writing on the following day, saying that "we have both now agreed that the firm has dissolved". Golstein claimed damages, the majority of which was his guaranteed minimum payment up to the end of the four-year minimum period.

First instance

Clause 35(d) of the Partnership Act 1890 provides that the court may dissolve a partnership:

"when a partner, other than the partner suing, wilfully or persistently commits a breach of the partnership agreement or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with him."

The trial judge held that the partnership had been dissolved by mutual agreement on June 30 2010 and that Golstein was entitled to damages which would be assessed as part of the taking of an account on dissolution. However, if he was wrong in this respect, Bishop's conduct was certainly sufficient to fall within Section 35(d) and, had the judge been asked to do so, he would have exercised his discretion to dissolve the partnership based on Bishop's various breaches.

The judge cited with approval two previous first-instance decisions(3) which provided that the doctrine of repudiation of a contract does not apply to a partnership,(4) but did not make his decision on that basis. The judge also did not address whether Golstein, in continuing to work for the partnership until the end of June 2010 – some months after the breaches listed in the particulars of claim – had affirmed the partnership agreement and/or given up his right to claim compensation resulting from Bishop's breaches. Bishop appealed.

Court of Appeal

Bishop accepted for the purposes of the appeal that the acts complained of had taken place, but argued that:

  • no single breach had been sufficiently serious to amount to a repudiatory breach of the partnership agreement;
  • no breaches were committed during the last three months of the partnership; therefore, had there been earlier repudiatory breaches, Golstein had chosen to affirm the partnership agreement and thereby had given up any right to claim damages for breach; and
  • the last-straw doctrine applied to their partnership arrangement and there had been no such last straw.

Why common law rules on breach of contract do not apply

Dissolution under the Partnership Act is discretionary. A judge will hear all the facts and make a decision as to whether it is just and appropriate to dissolve the partnership. In contrast, discharging a contract as a result of a repudiatory breach happens automatically when the innocent party accepts the breach. One of the key points made by Lord Millett(5) was that the statutory partnership regime sets out the grounds for dissolution, which does not include acceptance of a repudiatory breach.(6)

The relationship between partners is not the same as that between arm's-length parties to a commercial contract. Partners owe duties of absolute good faith to each other, which underpin all of their dealings with each other.(7)

Equally, while employers and employees are subject to duties of trust and confidence, the ending of their relationship does not usually lead to the employer's enterprise coming to an end, with all the ensuing fallout, including obligations owed to third parties and clients.

Repudiatory breach of contract would probably work as a doctrine only in a two-partner(8) firm; otherwise, completely innocent partners – without knowledge of the disagreement between two of their fellow partners – could wake up one morning to find their partnership dissolved.

Court of Appeal decision

The main thrust of the decision was that while Golstein had listed specific acts of Bishop in his statement of case, this was only for the purposes of providing particulars of the conduct about which he was complaining.(9) It was not appropriate to engage in "illegitimate salami-slicing" when considering Bishop's conduct, which had to be viewed in the round.

Importantly, there was no evidence of Bishop making attempts at any time before June 2010 to patch things up. The solicitors' letters put before the court by Bishop to prove Golstein's alleged "affirmation" of the partnership did nothing of the sort; rather, they showed an "unrelenting position" that the partners could not continue to work together. In any event, some of the breaches were continuing – in particular, the failure to involve Golstein in management decisions and the failure to speak to him at all.

While the judge emphasised that he was not seeking to give a judgment on whether repudiatory breach of contract can apply to partnerships, his clear view (albeit obiter) was that it should not. He stated that the grounds of appeal "wrongly assume that contractual principles of repudiation and... affirmation including the last straw doctrine... are directly applicable to a discretionary dissolution under section 35(d)".

The judge gave the example of a partner who 'soldiers on' in the face of breaches by his co-partner as broadly analogous to an affirmation on common law contract principles, but emphasised that this would not preclude a Section 35(d) dissolution; it would simply be one of the factors before the court when it was exercising its discretion.

Even if Golstein had in some way affirmed the partnership agreement, this was not the same as a waiver of all his already accrued rights,(10) so he would not lose his right to compensation in any event.

The judge also made clear that whether sums due to Golstein were called 'damages' (for breach of the partnership agreement) or 'compensation' (during an account for breach of partnership duty) was immaterial. In some cases, the facts would suit one analysis more than another.

The last-straw doctrine was compared to a "bridge" that an employee builds between serious past misconduct by an employer and less serious misconduct which causes the employee to choose to leave, to get over the difficulty of affirmation-type arguments which would or might stifle his or her claim. As there are no difficulties of this nature for partners, for the reasons explained by the judge, partners do not need to use the last-straw doctrine.

Comment

It has always been difficult to advise partners in partnership disputes as to how serious a breach by their co-partner must be for it to be 'repudiatory' and whether their (or the other party's) conduct has been sufficiently clear and unequivocal to constitute acceptance of such a breach, all of which leads to uncertainty. None of this is any good for the partners who do not know whether their partnership subsists, or for their clients either.

Therefore, this decision brings welcome clarity to the area; unless partners in a traditional partnership can persuade their co-partners to agree that the relationship cannot continue (as Golstein did),(11) they will have to go to court for a ruling.

However, this does mean that an innocent partner must go the expense of making a court application, or that there will necessarily be some delay before the partnership is dissolved.(12) It is also likely that a partner who has breached the terms of the partnership agreement will have to come within the wider 'just and equitable' ground in order to obtain a dissolution.(13)

For further information on this topic please contact Abigail Silver or Geraldine Elliott at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (abigail.silver@rpc.co.uk or geraldine.elliott@rpc.co.uk). The RPC website can be accessed at www.rpc.co.uk.

Endnotes

(1) [2014] EWCA Civ 10 (February 5 2014).

(2) Used in employment law.

(3) Obiter comments of Justice Millett in Hurst v Bryk [2002] 1 AC 185 and Mullins v Laughton [2003] Ch 250.

(4) Although in Millett's view, a distinction should be drawn between the partnership contract – which may be capable of repudiation – and the partnership relationship, which is not.

(5) In Hurst v Bryk.

(6) Either expressly or by stating that the rights in the Partnership Act were in addition to any common law rights which might exist.

(7) The same is not true of members of a limited liability partnership (LLP), unless such a duty is expressly included in their LLP agreement; see F&C Alternative Investment (Holdings) Limited v Barthelemy [2011] EWHC 1731.

(8) Or 'two camp'.

(9) In accordance with the Civil Procedure Rules.

(10) It is the difference between what Chitty on Contracts at 24-007 calls "waiver by election" and "waiver by estoppel".

(11) Or unless they can serve a valid notice to dissolve the partnership under Section 26(1) or Section 32(c) of the Partnership Act 1890.

(12) As was highlighted by Lindley & Banks on Partnership at 24-05 and following.

(13) Set out in Section 35(f); because of the inclusion of the words "other than the partner suing" in Section 35(d).